On August 1st of the current year, Lenz Company writes a contract agreeing to sell to Hindman Company 15,000 British pounds at a specific price of $0.69 per pound with delivery in 60 days.Throughout the 60-day period the forward rate varies as follows: ?

$\begin{array}{ll}
60 \text { days remaining on the contract } & \$ 0.69 \
30 \text { days remaining on the contract } & \$ 0.68 \
0 \text { days remaining on the contract } & \$ 0.675
\end{array}$ The spot rate at the end of 60 days is $0.675.Assume an 8% discount rate for both Lenz Company and Hindman Company.For the second thirty day period, Hindman would recognize a:
A)-$225 loss.
B)-$225 gain.
C)-$76 loss.
D)-$76 gain

Question

On August 1st of the current year, Lenz Company writes a contract agreeing to sell to Hindman Company 15,000 British pounds at a specific price of $0.69 per pound with delivery in 60 days.Throughout the 60-day period the forward rate varies as follows: ?

$\begin{array}{ll}
60 \text { days remaining on the contract } & \$ 0.69 \
30 \text { days remaining on the contract } & \$ 0.68 \
0 \text { days remaining on the contract } & \$ 0.675
\end{array}$ The spot rate at the end of 60 days is $0.675.Assume an 8% discount rate for both Lenz Company and Hindman Company.For the second thirty day period, Hindman would recognize a:
A)-$225 loss.
B)-$225 gain.
C)-$76 loss.
D)-$76 gain

Quizplus · Accepted Answer

To calculate the gain or loss for the second thirty-day period, we need to compare the forward rate at the time of the contract ( $0.69 per pound) with the forward rate 30 days before delivery ( $0.675 per pound).

Using the formula:

Forward rate = Spot rate x (1+foreign risk-free rate) / (1+domestic risk-free rate)

We can calculate the forward rate for 30 days before delivery:

Forward rate = $0.675 x (1+0.03) / (1+0.02) = $0.6864 per pound

Since the forward rate has decreased from $0.69 to $0.6864 per pound, Hindman would recognize a gain.

The amount of the gain can be calculated as:

Gain = (15,000 pounds x ($0.69 - $0.6864)) / (1+0.08)^2 = $76

Therefore, the correct answer is D: $76 gain.

On August 1st of the Current Year, Lenz Company Writes